Update: Loan and Lease Loss Provisions

I wanted to put up a quick post so members could make sense of a new numbers they’ll find on individual bank reports “Allowance for Loan and Lease Losses” (ALLL) and Loan Loss Provisions. The FDIC says of ALLL

An ALLL methodology is a system that an institution designs and implements to reasonably estimate loan and lease losses as of the financial statement date.

Later this week I’ll be bringing you more information about how to use this in your prospecting. I recently learned form one of our members, a former Wall St banker, about how to use this number to do a back of the napkin calculation to determine what your maximum deal volume would look like for any bank. Very cool.

The Office of the Comptroller of the Currency says of ALLL:

The allowance for loan and lease losses, originally referred to as the reserve for bad debts, is a valuation reserve established and maintained by charges against a bank’s operating income. It is an estimate of uncollectible amounts used to reduce the book value of loans and leases to the amount a bank can expect to collect (ref)

Loan Loss Provisions are the amount added (or subtracted) from ALLL. Read this excellent article at Seeking Alpha for some more color.

Comments

Brecht,
This article states “This new number shows as ‘Loss Provisions’, the long form would be Allowance for Loan and Lease Loss Provisions (ALLL)”.

To me this sentence is saying that “ALLL” and “Loan Provisions” mean the same thing. Based on that, I’m not clear as to why under “Bank Health and Indicators”, it says “Loan Loss Provisions” along with Tier 1 Risk Based and then “ALLL” along with Total Risk Based. Is there a difference then between “Loan Loss Provisions” and “ALL”? If not, then why not have “ALLL” in each row? Is there a difference between “Loss Provisions” and “Loan Loss Provisions”? I just want to make sure I understand this data so I can effectively communicate with asset managers… Thank You.

Paul, As you research this topic you’ll find Loan Loss Reserves, Allowance for Loan and Lease Losses, Loan Loss Provisions, Loss Provisions and similar abbreviations referring, sometimes interchangeably, to this ‘bucket’. I’ve made some clarifications in the post above that I hope are helpful. Essentially ALLL is the bucket and Loan Loss Provisions are what you’re adding to the bucket if that analogy works for you.

In BankProspector you should regard each of those columns as their own content the left middle and right columns could stand alone or on top of each other, the columns aren’t related. I have them setup as they are just to condense the view, perhaps we should expand it and avoid confusion.

Asset managers, or special assets officers, or workout groups aren’t necessarily going to know, in big banks they almost certainly won’t, what the ALLL bucket has in it. That’s for you to know and their CFO or Controller. You want to know it because you want to know if they have sufficient capital to absorb the losses they’ll incur when they sell to you at a discount and you know what that discount is based on what you’re doing in the market. It’s not something you’ll probably chat about. Hope this is helpful.